When it comes to the unfolding debate within the Federal Reserve over the timing of a prospective tightening of U.S. monetary policy, Global Markets Intelligence (GMI) Research observes that the opposing camps can be characterized as follows: Those who believe that the U.S. economic recovery has yet to progress to the point where it has achieved the targeted level of resource utilization (i.e. absorbing unused labor market slack), as opposed to those Fed officials who see existing healthy macroeconomic fundamentals as being completely out of step with existing monetary policy. In our view, since these two groups appear to have vastly different priorities for guiding U.S. monetary policy, the debate within the Fed in coming months will boil down to whose side is best justified and thus supported by upcoming economic data.
From this perspective, recent updates on the economy, overall, appear to align with the opinion that tightening could occur sooner rather than later. Following severe winter weather induced weakness in the first quarter of this year, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) for the past five months has been on par with the healthy readings seen during the second half of 2013. U.S. Durable goods orders, a good proxy for capital expenditures, have also been quite strong of late. As of data for July, non-defense capital goods orders, excluding aircraft orders, rose by more than eight percent on a year-on-year basis. Consumer confidence (The Conference Board) has also been accelerating, rising to the strongest level seen since October 2007, and U.S. auto sales have now improved to 17.5 million units annualized, the best sales rate seen since January 2006.
For all the strength displayed in recent economic updates, Friday's weaker than expected employment report (NFP +142k Aug.) does however partially neutralize much of the optimism implied in recent data, helping to maintain policy debate equilibrium within the Fed for the time being, in our view.
For more, read the full edition of The Lookout Report.